NewMarket Corporation — Q3 2012 Form 10-Q
Business context and period. Unaudited results for the quarter and nine months ended September 30, 2012. NewMarket’s principal business is petroleum additives; other reported activities include real estate development and TEL-related operations.
Financial performance and liquidity
- Q3 revenue: $554.0 million, down 0.6% year over year. Petroleum additives revenue was $547.7 million; shipments were substantially unchanged, with higher prices offset by unfavorable currency effects.
- Nine-month revenue: $1.707 billion, up 3.8%. Petroleum additives revenue rose 3.8%, primarily on higher selling prices, partly offset by unfavorable currency and a 3.1% shipment decline.
- Q3 earnings: Gross profit was $162.1 million versus $145.2 million; operating profit was $94.8 million versus $120.9 million; net income was $64.7 million versus $71.4 million. Diluted EPS was $4.83 versus $5.22. The prior-year quarter included a $38.7 million legal-settlement gain.
- Nine-month earnings: Gross profit was $497.0 million versus $434.0 million; operating profit was $295.7 million versus $284.1 million; net income was $186.5 million versus $173.2 million. Diluted EPS was $13.91 versus $12.54. 2012 included a $9.9 million debt-extinguishment loss; 2011 included the $38.7 million settlement gain.
- Costs and margins: Q3 SG&A was $37.1 million and R&D was $30.2 million; nine-month SG&A was $114.7 million and R&D was $86.6 million. Management cited pricing and slightly lower Q3 raw-material costs as profit supports, partly offset by currency and increased R&D. Petroleum additives rolling-four-quarter operating margin was 16.4%.
- Cash flow: Nine-month operating cash flow was $185.3 million, versus $120.4 million; capital expenditures were $25.4 million. Working-capital changes used $41.6 million. Cash rose to $79.7 million from $50.4 million at year-end.
- Debt and liquidity: Total debt, including current maturities, was $144.2 million, down $99.3 million from December 31, 2011. Working capital was $537.1 million and the current ratio was 3.38. The new $650 million unsecured revolver had $138.0 million drawn and $506.6 million unused, including effects of letters of credit. The company reported compliance with covenants; leverage and interest-coverage ratios were 0.41 and 25.66, respectively.
- Capital returns: Dividends declared for the first nine months were $2.25 per share. A $250 million share-repurchase authorization was approved in July; no shares were repurchased in Q3.
Material changes, outlook, and risks
- In March, NewMarket replaced its $300 million revolver with a five-year $650 million facility maturing in March 2017. It used facility borrowings to redeem $150 million of 7.125% notes and repay the $63.5 million Foundry Park I mortgage loan. The refinancing lowered borrowing costs, but the company recognized a $9.9 million early-extinguishment loss.
- Management expected 2012 to be more profitable than 2011 and described business fundamentals as unchanged. It cited long-term industry demand growth of 1%–2%, while warning that global economic weakness could soften demand, that full-year market growth might decline, and that second-half shipments might be below first-half levels. Estimated 2012 capital spending was approximately $35 million.
- On October 25, 2012, the board declared a regular $0.75-per-share dividend and a special $25-per-share dividend, payable November 27 and December 21, respectively. The company expected to fund approximately $335 million for the special dividend by drawing on the revolver.
- The Department of Justice is reviewing certain foreign activities for compliance with U.S. economic sanctions and anti-corruption laws, as well as historical domestic-market conduct. NewMarket is cooperating and conducting an internal review; the filing does not quantify potential exposure.
- Environmental remediation accruals totaled approximately $20.2 million at September 30. Management said it believed known issues were fully accrued, but unexpected costs could materially affect financial results or cash flows. It also reported incidental litigation and stated it did not expect pending proceedings to have a material adverse effect.
- The Goldman Sachs interest-rate swap had a reported net liability fair value of $32.7 million for the collateral provision; $37.8 million of cash collateral was posted. Changes in the non-hedge-accounted swap’s fair value affect earnings.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Key facts investors should verify
- Whether Q4 demand, shipments, pricing, raw-material costs, and foreign-exchange effects matched management’s cautious 2012 outlook.
- The effect of funding the approximately $335 million special dividend with revolver borrowing on debt, interest expense, liquidity, and covenant headroom.
- Any developments, provisions, or financial consequences from the DOJ review and the company’s internal investigation.
- Changes in environmental remediation estimates, pension obligations, or swap valuation and collateral requirements.
- Whether operating cash flow and working capital remain sufficient to support investment, dividends, and debt obligations.